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What Is Carriage and Insurance Paid to (CIP)?
Carriage and insurance paid to (CIP) is a global trade term by which a seller pays freight and insurance costs to transport goods from its factory to a carrier designated by the seller. The risk of damage or loss to the goods being transported transfers from the seller to the buyer as soon as the goods are delivered to the buyer’s representative.
CIP is comparable to but different from cost, insurance, and freight (CIF), an agreement that is used in maritime trade and commodity trading. Under CIP, the seller is obligated to insure goods in transit for 110% of the contract value. If the buyer desires additional insurance, they must arrange for it on their own.
CIP and CIF are two Incoterms, a set of globally accepted commercial trade terms published by the International Chamber of Commerce (ICC).
Key Takeaways
- Carriage and insurance paid to signifies that the seller of goods must pay freight and insurance when sending them after purchase to a buyer’s representative.
- The seller must insure the goods being sent for 110% of their contract value.
- If the buyer wants a greater amount of insurance coverage, typically they must pay for it.
- CIP covers transit of goods from the seller’s factory or warehouse to the buyer’s home country (but not to the products’ final destination).
How CIP Works
CIP, one of several long-standing uses of insurance for international trade, provides for the seller to pay costs to deliver products to a named destination.
For example, CIP New York means that the seller pays freight and insurance charges to New York. As is the case with carriage paid to (CPT), carriage or freight charges with CIP refer to transportation charges for any accepted mode of transport, such as road, rail, sea, inland waterway, air, or multimodal transport involving a combination of methods.
For example, say that LG in South Korea wants to ship a container of tablet computers to Best Buy in the United States. Under CIP, LG is responsible for all freight costs and minimum insurance coverage to deliver the tablet computers to the seller-selected carrier at an agreed-upon destination in the United States.
Once the shipment is delivered to Best Buy’s appointee, LG’s obligation is complete, and Best Buy assumes full risk and responsibility for the shipment.
Important
Incoterm rules were first published in 1936 and have been updated periodically since then. CIP was added to the rules in 1980.
Additional Coverage Under CIP
As the seller is only obligated to purchase the minimum amount of insurance coverage to transport the shipment to the destination, the buyer should consider arranging additional coverage that protects the shipment from all risks. Otherwise, the buyer may have to bear huge losses if the shipment is damaged or lost through some adverse event that is not covered by the minimal insurance provided by the seller.
Fast Fact
CIP only covers losses from the seller’s factory or warehouse to the first destination specified by the buyer. The buyer takes responsibility for the remaining journey to their facilities.
The buyer may also ask the seller to provide extra insurance coverage and—depending on the relative bargaining positions of the buyer and seller—negotiate for the seller to bear part or all of the cost of such additional insurance.
What Does Carriage and Insurance Paid to (CIP) Cover?
CIP is a globally accepted Incoterm devised by the International Chamber of Commerce which define common contract terms covering the cost of shipping items in a business sale. CIP requires the seller to pay for both freight and insurance costs in sending goods to a carrier chosen by the seller at a mutually agreed-upon location. As soon as the goods are delivered, the risk of damage or loss becomes the buyer’s.
How Does CIP Differ From CIF?
CIP and CIF Cost, Insurance & Freight) are similar terms that apply to transportng cargo which assign the transportation costs and risks to the seller. The main diffence is that CIP calls for the seller to purchase cargo insurance covering the contract value of the goods in transit, while CIF does not. CIP relieves the buyer at risk until delivery, but CIF means higher product costs because the seller must obtain insurance.
How Much Insurance Does CIP Require?
The seller must take out 110% of the contract value in insurance. If the buyer wishes to have more insurance, arranging and paying for it is their responsibility.
What Kind of Transport Is Eligible for CIP?
Any form of recognized transport can be used, including road, rail, sea, inland waterway, air, freight forwarding, and any combination of those methods. If the agreement covers multi-modal transportation, CIP only covers the first carrier at the place of shipment.
What Are Incoterms?
Incoterms are commonly-accepted rules that apply to the transportation industry. When included in sale contracts, Incoterms create legal obligation for all parties involved, so sellers and buyers should be sure they understand the terms and their impact.
The Bottom Line
The term “carriage and insurance paid to (CIP)” means the seller will pay freight and insurance when sending goods to the buyer or their representative at a location agreed upon by both parties. The seller must insure the goods for 110% of their contract value. CIP is an Incoterm, a global trade term devised by the International Chamber of Commerce (ICC) and accepted worldwide.
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